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Last Wednesday, March 22, the president of the Federal Reserve (Fed), Jerome Powell announced a new rise in interest rates, a difficult decision according to the official’s statements in the middle of a strong financial collapse of two banking entities and the implementation of emergency measures to contain contagion throughout the system.
After the ninth increase in interest rates, Powell made it clear that “credit conditions will be tighter for households and companies, which in turn would affect economic results”, which in a nutshell for some analysts means, more unemployment.
Indeed, The Fed’s actions to control inflation have among their objectives cooling, the high rates of consumption and the labor market through high interest rates. The current unemployment rate stands in the 3.6% range, but raising it a few more points would mean more than 1.5 million Americans would be out of a job by the end of this year.
It seems that this year the problems to be solved are added to the Fed, which is no longer just bringing inflation to 2%, now it is minimizing unemployment and stabilizing the financial system. For some analysts it will be impossible for the monetary formulators to make everything work without first not causing a recession.
For the chief economist of RSM US, Joe Brusuelas, “we are in a situation with high inflation and now a banking crisis. Therefore, The Fed’s attempt to strike a delicate balance between price stability, employment, and financial stability will require something to give; and that something will be around 1.5 million jobs, if the Fed’s forecast is prescient for the 4.5% unemployment rate,” she noted.
Brusuelas mentioned that there is a way to solve the situation and it is through the banking crisis “the tightening of credit standards and the actual loans that will occur as a result of this will cool the economy significantly, and that could prevent further job losses.” Indian.
Although the economist warned that banking crises are “deeply non-linear events and are going to impact different industrial systems in singularly different ways,” he said.
However, Financial regulators have taken the respective measures to contain contagion throughout the banking system and avoid a crisis like the one in 2008. But, for Gregory Daco, chief economist at EY-Parthenon, “business cycles can also evolve in a non-linear way,” he said.
Therefore, Daco assured that it is very likely that we will see slower economic activity. “I think the chances of a recession have increased as a result of this crisis in the banking sector and in particular, I think we should pay close attention to credit conditions”, he stated, while saying that said credit standards for loans to companies will grow from 75% to 80%.
Keep reading:
- Bank collapse puts the Fed between “a rock and a hard place” over upcoming interest rate hikes
- Inflation in February was 6.0% per year, the smallest increase in the US in 17 months
- Silicon Valley Bank: why the American bank collapsed and what the rescue of its clients by the US Federal Reserve means.